“Section 36(4)(vii)”
The decision most relied on for Section 36(4)(vii) is Maharashtra Sugar Mills Ltd: 82 ITR 452 (SC) and Rajasthan State Warehousing Corporation v. CIT (242 ITR 450), cited in 154 judgments on BharatTax.
Leading authorities on Section 36(4)(vii)
Expenditure incurred by an assessee operating a composite business that generates both taxable and non-taxable income is fully allowable without apportionment. This position led to the subsequent insertion of Section 14A, which disallowed expenditure related to earning exempt income.
Circulars and instructions issued by the Central Board of Direct Taxes (CBDT) under Section 119 of the Income Tax Act have the force of law and are binding on all income tax authorities. These circulars can mitigate the rigour of statutory provisions, provide administrative relief, and ensure uniform application of the Act for the benefit of the assessee.
This case establishes that a statutory amendment, specifically Section 9(1)(ii) relating to income deemed to accrue or arise in India (salary for services/leave), applies prospectively from its effective date, such as April 1, 2000.
For banks, bad debts written off from non-rural advances are not subject to the limitations of the provisos to sections 36(1)(vii) and 36(1)(viii), as these provisos apply only to rural advances; section 36(1)(viia) also applies exclusively to rural advances. Additionally, depreciation on investments valued at market price on the balance sheet date is eligible for deduction.
When bad debts written off were not allowed as a deduction, any subsequent recovery from such bad debts cannot be brought to tax. This principle is upheld even if a deduction for provisions for bad and doubtful debts was allowed under section 36(1)(viia).
Section 41(1) of the Income Tax Act is not applicable to taxing a balancing charge under section 41(2) or to bad and doubtful debts specifically covered under section 41(4), as these provisions deal with distinct circumstances.
Advances made by banks that become bad debts are eligible for deduction under Section 36(1)(vii) if they meet the conditions specified in Section 36(2).
Excess Dividend Distribution Tax (DDT) paid by a company is refundable to the assessee, even though Section 115-O(4) states DDT is a final payment.
